Be nimble on margins
You can’t operate a profitable business without healthy margins. And you can’t afford to risk hemorrhaging profits.
With the volatility of the supply chain, margins take more time and attention than ever before. But mindfulness of detail will pay off with dividends in the long run because your business will be sustainable.
“It is always important to know what margin goals you have for your operations and use them to guide your margin management,” said Cody Goeppner, who joined Bleyhl co-operative in 2018 and recently stepped into the role of director of retail operations.
Goeppner oversees strategic planning of the farm stores, day-to-day management of retail operations, and marketing efforts for the business which was first founded by Alex and Carl Bleyhl in 1964 in the Yakima Valley in Washington state.
Today the co-op serves wholesale agriculture growers through orchard and vineyard, energy and agronomy while serving both members and communities through its farm stores.
“If you always want to be the best price in town, you may have smaller margins, but higher volume; but, on the flip side another operator may pride themselves on quality products and service, and be able to pad their margins a little bit more. Ultimately, your market will tell you where you should be — you just need to listen,” said Goeppner.
Hardware store owners might ask themselves this question: ‘How critical is it for me to manage my margins this year?’
According to Goeppner, this should be the second highest priority for any independent retailer this year — right behind enhancing human resource campaigns to take care of employees. “Take care of your people first and your margins second,” he said.
Retailers should be monitoring their margins daily; but, as for adjusting, that would only need to happen as necessary.
“Adding a step to the procurement or receiving process to ensure your cost is below your retail is simple and highly effective,” said Goeppner. “It is still reactionary, but you’ll be able to catch more items that would generally slip by. POS systems like Epicor have notification features that you can set up to notify you when this happens as well.”
The director of retail operations said, “bleeding money would come from costs increasing, but retail prices not being increased.”
This could happen with any given product and without being checked could result in significant losses.
Margin management software is available as well, “but we do not currently use it. We rely on our system and personnel to manage margins,” he said.
Price pane
Hardware store owners can put procedures in place to stay on top of the changing cost of products and the price points.
The first step to managing margins is knowing where you want each department or product line to fall. Each department can be drastically different than another while different products within the same department can also be different.
“We have set a ‘margin window’ for each department and class in our farm stores and when we see cost increases, we ensure the product lines fall within that window and increase the price accordingly,” said Goeppner.
Also, his operation has implemented a process, “to compare our increased retail price with the market in which our inventory coordinator will compare our suggested retail price to our local competitors to ensure we are still competitive.”
Once you’ve created your margin windows and you have a relative idea of where your competitors and your local market are, it is important to set up a process to ensure no product falls through the cracks.
“We check these margins at the time of purchase, receipt and when doing cycle counts,” he said. “We also have reports set up in our system to notify management when any product is sold under 10% margin. This isn’t proactive, but another safety net we implemented so we can make sure we catch as many pricing adjustments as we can.”
Margin 101
Simply put, margin management is the practice of ensuring you are managing the difference between the cost of the product and the retail price at your hardware operation.
We all know this is ultimately the money you pay your employees and expenses from and more importantly how you generate a profit.
“Through the unprecedented nature of COVID-19 and the supply chain issues we have all dealt with over the last two years, we have found this to be a top priority every step of the way,” said Goeppner. “With 30-40% increases on certain products, stores are more likely to sell products below cost if they don’t have a margin management program in place.”
Many vendor partners provide pricing strategies for independent retailers, but when stores offer highly diverse product lines from multiple vendors this becomes even more necessary to manage yourself.
The beauty of the independent hardware industry is that each operation is different than the next, but you all strive to do the same thing — best serve your customers. This principal also applies when discussing margin management.
“It is imperative for operators to understand their market and the customers they serve because each community is going to perform differently in how their consumers shop,” said Goeppner.
The first three steps to margin management, he said, are as follows: “One, know your customers and what they’re looking for and how much they’re willing to pay. Two, cultivate and nurture your vendor relationships by sharing your company’s vision. Three, communicate the needs of your customers to your vendor partners.”
Once you’ve followed through on steps 1-3, you can now focus on procuring product lines knowing you are bringing in the correct assortments.
“With the market shifting from demand to supply,” Goeppner said, “our procurement plan and ultimately margin management had to shift drastically from being reactive to a rather stagnant market to proactively managing an ever-changing supply.
“We used to analyze pricing at time of receiving, but we shifted this to time of purchasing due to the drastic increases we were experiencing. We had to mark our products up before we received them to respond to the market in real time,” he said.
Another interesting part of this, he said, “is that our customers’ needs haven’t drastically changed, and, in my opinion, our goods and services are needed now more than ever; however, with the significant cost increases we are experiencing it is important we are in tune with our customers every step of the way to ensure they’re able and willing to pay the prices retailers are going to have to mark up to.”
If a retailer sells a product higher than the customer is willing to pay, “even if our competitors are marking it up to the same retail — the customer may choose to go without.” Goeppner said that may leave retailers with, “excess of products at a higher price over a longer period of time.”
Implementing margin checkpoints throughout your processes will ensure you’re not leaving money on the table and can operate profitably through the pandemic and beyond.
“If you can get this right during difficult times,” Goeppner said, “it will be a cinch for you, when things are more stable.”